China Debt Upgrade Looms as a ‘Double-Edged Sword’

China joined emerging markets from Turkey to Colombia whose debt ratings may rise, a trend that might make it cheaper for them to borrow while escalating pressures for their currencies to appreciate.

China may be upgraded within three months from the fifth-highest ranking of A1, Moody’s Investors Service said in an e-mail today, citing the nation’s economic strength and ability to contain losses from unprecedented lending.

Asia’s role as leader of the world recovery has lured $2 billion of capital inflows daily since 2009, spurring record gains in foreign-exchange reserves, according to DBS Group Holdings Ltd. Intervention by nations including China to limit currency gains is stoking trade tensions, with Brazilian Finance Minister Guido Mantega warning last month of a “currency war.”

“The credit quality of emerging markets is now seen as having substantially improved, this is really unprecedented,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “That’s why we are seeing tremendous capital inflows, making it a double-edged sword for emerging markets.”

The Shanghai Composite Index closed 3.1 percent higher, the biggest gain in four months. The yuan touched 6.6703, the highest level against the dollar since 1993.

Yuan Implications

“Certainly this adds to the pressure on China to accelerate the pace of renminbi appreciation,” Prakash Sakpal, an economist at ING Groep NV, said in a phone interview from Singapore, referring to the Moody’s decision. “An upgrade would reflect China’s strong economic growth outlook, which is another way of saying you need a stronger currency.”

Premier Wen Jiabao’s government has limited gains in the yuan to less than 2.5 percent against the dollar since allowing greater flexibility in the currency in June. Authorities had kept it pegged about 6.83 for almost two years.

China’s resilience after the global financial crisis, and expectations of strong growth over the medium term are key reasons for the review, Moody’s said.

Stimulus Program

The ratings company also cited what it termed an effective stimulus program, which is now being unwound, the central government’s credit fundamentals, and the likely containment of losses from record lending. China’s growth accelerated to as fast as 11.9 percent in the first quarter of this year after an unprecedented $1.4 trillion of lending in 2009.

Moody’s on Oct. 5 raised the outlook on Turkey’s rating for local and foreign-currency debt to positive from stable. Colombia may be raised to investment grade next year, and the rankings of Bolivia, Paraguay, and Uruguay may also increase, Gabriel Torres, an analyst at Moody’s Investors Service in New York, said yesterday.

By contrast, public debt in some of the world’s largest economies is on an “explosive path,” Standard & Poor’s said in a report today.

In Europe, mounting fiscal problems forced Greece to seek a European Union-led bailout in May, while Irish and Portuguese borrowing costs have soared on concern that they may also need aid.

Debt Ratio

The International Monetary Fund has estimated China’s ratio of debt to gross domestic product will be 20 percent this year, compared with 133 percent for Greece and 93 percent for the United States. The number for China excludes local-government liabilities.

China’s outstanding government debt, including local- government borrowing, was 6.34 trillion yuan ($950 billion) as of the end of August, according to Chinabond, a clearing house. The nation’s foreign-currency reserves stand at $2.45 trillion.

China’s largest banks weren’t materially damaged by the global crisis and aren’t likely to pose any “sizable contingent liability risk to the government’s balance sheet,” Moody’s said today. Future credit losses will be mostly absorbed “by the banks themselves, either from capital, or from future earnings,” the ratings company said.

Other analysts have signaled greater concern. Fitch Ratings said Sept. 17 China could face a “hangover” from stimulus efforts in 2009, including strong credit growth, “which could still see the emergence of problems requiring sovereign support to clear up, for example in the banking system.”

China joined emerging markets from Turkey to Colombia whose debt ratings may rise, a trend that might make it cheaper for them to borrow while escalating pressures for their currencies to appreciate.
China may be upgraded within three months from the fifth-highest ranking...